China will never start a currency war, Premier Li said in World Economic Forum 2015 (Summer Davos)

Premier: China’s economy moves in positive direction 

The future of China’s economy is bright thanks to a solid base and strong impetus, said Premier Li Keqiang at the opening ceremony of the Summer Davos meeting in Dalian, northeast China, on Thursday.

Li said it was not blind optimism because China had the advantages of huge potential and inner tenacity.

Major programs to promote new industrialization, information technology, urbanization and agricultural modernization are now in progress, which will contain domestic demand.

China’s variety of industries guaranteed an economy characterized by resistance and self-recovery, Li said.

Structural reforms, to realize sustainable economic expansion, have been successful, the premier said.

As the largest developing country in the world, China will continue to roll out measures to maintain medium-high growth with higher efficiency and quality.

Li highlighted the reform of the financial sector, stressing the importance of market and laws in fostering a fair, transparent and stable capital market as well as improving risk controls.

China has the support of high savings and large foreign exchange reserves, and reforms will improve the usage of such resources to support the real economy.

Besides cutting interest rates and reserve requirement ratios, China has scrapped the interest rate ceiling for both loans and deposits, and will allow more private capital to enter the sector as well as boost private banks, financing assurance and financial leasing, the premier said.

He also mentioned the recent changes to the yuan’s central parity system, stressing that the move had nothing to do with boosting exports, and the country is unwilling to see a currency war, as it will be harmful to China.

The inter-bank foreign exchange market will be opened to foreign central banks, and a cross-border RMB payment system will be established by the end of 2015 to improve the yuan offshore market, Li said. – (Xinhua)


DALIAN, Sept. 9 (Xinhua) — Premier Li Keqiang told global business leaders on Wednesday that the Chinese economy is still running within a proper range.
The economy is stabilizing despite a slower growth pace, Li said at Summer Davos held in northeast China’s port city Dalian.Full Story
BEIJING, Sept. 8 (Xinhua) — Recent financial volatility has cast a shadow on the Chinese economy, but people need to view the bright side if they want to have the full picture.
Chinese officials never deny that the world’s second largest economy is facing trouble, it is not easy to deliver an annual growth of around seven percent after three decades of rapid expansion.Full Story
ANKARA, Sept. 5 (Xinhua ) — The Chinese economy has entered a “new normal” status and the growth rate of economy is predicted to be around 7 percent in the coming 4 to 5 years, said Chinese Finance Minister Lou Jiwei here on Saturday.
Lou said it in a written statement after the 2-day G20 Finance Ministers and Central Bank Governors Meeting in Ankara Turkey.Full Story

Why not abolishing wars, seeking peace in the 70 years after WW2 & inception of the UN?

TheWorldWar_2Why should an organisation devoted to saving “succeeding generations from the scourge of war” make it its business to authorise war?

In the 70 years since the inception of the UN, the world has unfortunately witnessed many theaters of conflict. 

SEVENTY years ago, the Charter of the United Nations solemnly proclaimed that the people of the UN were determined to “save succeeding generations from the scourge of war” and to “establish conditions under which justice … can be maintained”.

Peaceful resolution of disputes was the over-arching ideal of the Charter. However, the Charter permitted two exceptions under which recourse to war was permissible:

> Under Article 51, a nation can defend its sovereignty against an armed attack.

> Collective use of force can be undertaken under Chapter VII of the Charter under a resolution of the UN Security Council.

In the euphoria of the establishment of the UN, these two provisions were regarded as just and fair exceptions to the prohibition on the use of force.

But with the tragic misuse of UN authorised interventions in Afghanistan, Libya and Syria, one is made to wonder why an organisation devoted to saving “succeeding generations from the scourge of war” and securing peace and justice should make it its business to authorise the revolting actions that necessarily flow from war.

It is therefore timely to demand that the provision relating to collective use of force under Chapter VII be reviewed or repealed.

Spiralling wars: In the 70 years since the inception of the UN, the world has unfortunately witnessed many theatres of conflict. In a nuclear age, the savagery of war has become even worse. The grounds on which war can be waged have expanded.

Anticipatory self-defence: Some powerful nations like the US and Israel have interpreted the Charter to read into it the right of pre-emptory attack or anticipatory self-defence.

Humanitarian intervention: A new ground of “humanitarian war” without the authority of the UN has been established extra-legally by the American-European Union Alliance.

Regime change: Wars for the purpose of regime change were and are being waged in Afghanistan, Iraq, Libya, Syria and Yemen.

Proxy wars: Many rich and powerful states are fomenting civil wars and supporting armed mercenary forces for the purpose of subverting the sovereignty of other states. Tragic examples are Yemen, Libya, Syria and Ukraine.

Privatising torture: Since the 90s, wars, incarceration in overseas prisons and torture have been privatised. This is a wicked way of avoiding accountability under national laws.

Terrorism: Unspeakable horrors are being committed by terrorist groups like the IS. However, it must be stated that all terrorism, whether by private groups or state actors, is an abomination. On the pretext of combating terrorism, many states are committing atrocities both within their territory and abroad.

Targeted killings: Extra-judicial assassinations of the officials of other states or national liberation movements are being carried out by drone attacks, special-forces units or covert operations.

Humans as guinea pigs: Some nations are developing, deploying and testing their new weapon systems in countries that they invade or occupy – countries like Afghanistan, Iraq and Gaza whose population has become a guinea pig for testing deadly weapons.

Threat of missile attacks: Threats of missile and nuclear attacks have become standard language of foreign policy. This is a violation of international law.

Selective sanctions: In the name of human rights, sanctions are being enforced but in a very selective way by the Security Council and by individual nations against their opponents. This is despite overwhelming proof that sanctions hurt innocent civilians and cause untold misery and deprivation to the weakest members of society.

The ICC: The International Criminal Court has gone into operation. But nations like the US and Israel refuse to join it. The UN Security Council and the ICC have brought to book a few war criminals. Sadly, the work of the ICC shows a terrible ethnic bias against Africa. Mass murderers from the USA, EU and Israel remain immune.

Cold War reignited: The Cold War has become reignited and with it new theatres of conflict as in Ukraine are causing massive loss of life.

Merchants of death: The arms trade continues unabated and ignites and fuels regional wars and retards the search for political solutions to international disputes. All arms traders are merchants of death but enjoy a prestige and wealth unknown to many other professions.

Western exceptionalism: Western unilaterism is a sad reality of geopolitics today. In the last decade itself, there were full scale invasions of Afghanistan and Iraq on trumped up charges plus bombing of Pakistan, Yemen, Somalia, Libya and Syria. In Yemen, Libya and Syria, western proxies are in the forefront of the so called civil war.

US drones blow up “enemy combatants” in many parts of the world with sickening regularity. Despite its professed belief in democracy, Washington has a sorry record of collaborating with right-wing military officers to overthrow elected leaders who do not do Washington’s bidding. The latest victims are Morsi in Egypt in 2013 and Yanukovych in Ukraine in 2014.

On July 3, 1988 the United States shot down an Iranian Airbus killing 290 passengers. The Western world expressed only muted regret.

Genocide in Palestine: US and European complicity with Israel in the 67-year old genocide of the Palestinians is an undeniable fact. As I write, Israel continues to butcher children, women and civilians in Gaza.

Srebrenica: Dutch complicity in the massacres in Srebrenica is well documented.

Structural violence: Add to these military atrocities, the structural violence and oppressive economic systems of the West. There is a desire to consolidate an uncompromising version of corporatism that seeks total economic hegemony over Asia and Africa.

Environment: An environmental catastrophe is awaiting the world unless we take adequate measures to control the threat. Needless to say that part of the ecocide is contributed by the use and misuse of weapons of mass destruction.

In sum, it is a pretty grim situation in the world today. What can be done to bring about a more peaceful and just world? There are obviously no simple solutions. A comprehensive, holistic approach is badly needed.

Reflecting On The Law by Shad Saleem Faruqi

Shad Faruqi, Emeritus Professor of Law at UiTM, is a passionate student and teacher of the law. He can be reached at The views expressed here are entirely his own.

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of thousands of civilians, but the mainstream media outlets in the US have largely ignored the tragedies and focused on the loss of their own

U.S. Treasury Sticks It To The China Haters

Treasury says it again, China  not manipulating its currency.

This is getting better and better.

On the market side, the China haters are looking more and more ridiculous. Not that I’m a China bull. I’m not smart enough to say that. And I have money in China. But I am smart enough and am surrounded by even smarter people who have led me to believe there is no hard landing.  So on the market side, the China naysayers are wrong.

On the political side, the China haters who think the country is stealing all our Nike shoe and Optimus Prime assemblying jobs thanks to their currency manipulation are also wrong. For the second time this year, the U.S. Treasury Department said in its report to Congress on international economic and exchange rate policies that, wait for it…China is not a currency manipulator.  The two or three guys advising Mitt Romney on China were wronger than Tim Tebow starting as QB for the Jets.

“The Treasury Department once again made the right call on China’s currency policy in its report to Congress. Labeling China a currency ‘manipulator’ would do little to help us reach the goal of a fully convertible currency and market-driven exchange rate for China,” said John Frisbie, president of the U.S. China Business Council, a lobby of multinationals working in China.

“Adding the very public ‘manipulator’ tag might simply produce pressure within China to slow down progress on this (forex) issue,” he said in a statement Tuesday.

China’s exchange rate has strengthened over 30 percent against the dollar over the past several years. The upshot is that the exchange rate has little to do with the U.S. trade balance or employment. Even as the renmimbi weakened, the U.S. trade deficit with China worsened.

Of course, not being a currency manipulator doesn’t mean that the renmimbi (RMB) is properly valued.

From the report:

The renminbi has appreciated by 9.3 percent in nominal terms and 12.6 percent in real terms against the dollar since June 2010. China’s trade and current account surpluses both have fallen to 2.6 percent of GDP from peaks of 8.8 and 10.1 percent of GDP, respectively.  The Chinese authorities have substantially reduced the level of official intervention in exchange markets since the third quarter of 2011, and China has taken a series of steps to liberalize controls on capital movements, as part of a broader plan to move to a more flexible exchange rate regime.  In light of these developments, Treasury has concluded that the standards identified in Section 3004 of the Act during the period covered in this Report have not been met with respect to China. Nonetheless, the available evidence suggests the RMB remains significantly undervalued, and further appreciation of the RMB against the dollar and other major currencies is warranted.” China’s real effective exchange rate (REER) – a measure of its overall cost-competitiveness relative to its trading partners – has appreciated since China initiated currency reform in mid-2005, after declining between 2001 and 2005. From July 2005 to October 2012, China’s real effective exchange rate appreciated by 27 percent. The REER appreciated particularly rapidly in the last several months of 2011, resulting in total REER appreciation of 6.2 percent over the course of 2011. Over the ten months of 2012, China’s REER has been unchanged.

The International Monetary Fund concluded that the RMB was moderately undervalued against a broad basket of currencies, and said that the RMB was undervalued by between 5 and 10 percent as of July 2012.

Reserve accumulation, an indicator of the degree of Chinese intervention in the currency market, has slowed markedly since the third quarter of 2011 as China buys less U.S. debt.

Even with the reduced pace of dollar accumulation, China’s official foreign exchange reserves remain exceptionally high compared to those of other economies, and well beyond established benchmarks of reserve adequacy. As of end-September 2012, the PBOC held $3.3 trillion in foreign reserves, equivalent to 42 percent of China’s GDP, or about $2,440 for every Chinese citizen. 

10 Things “The End of Cheap China” Means for You

Getty Images North America Your espresso will get more expensive . . .

+ show more

Your espresso will get more expensive . . .

China, traditionally a tea-drinking nation, is now Starbucks’ largest market outside of the U.S., and the company plans to have more than a thousand cafés in the country by 2015. The Chinese middle class’ growing taste for premium coffee is causing commodity prices to soar; in 2011 Arabica bean prices hit their highest peak in over three decades, and analysts attributed that to fast demand growth in China as well as in Brazil and Indonesia.

Kenneth Rapoza By Kenneth Rapoza, Forbes Contributor

Covering Brazil, Russia, India & China.

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Yuan or not to Yuan? Yuan way to new monetary order

A ‘grown-up’ yuan means a more stable world economy


CHINESE New Year has come and will soon go. The eurozone debt crisis is well past two years. Yet uncertainty persists. The World Bank‘s January 2012 Global Economic Prospects reports:

“World economy has entered a very difficult phase characterised by significant downside risks and fragility and as a result, forecasts have been significantly downgraded. However, even achieving these much weaker outturns is very uncertain Overall, global economic conditions are fragile.”

This week’s IMF World Economic Outlook says more of the same: “The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere.” China, India, South Africa and Brazil have entered a slowing phase.

No country and no region can escape the consequences of a serious downturn. Nevertheless, growth in the East Asia and Pacific region (excluding Japan) is expected to slowdown to about 7.8% in 2012 (8.4% in 2011) and stabilise in 2013.

This reflects continuing strong domestic demand (evident in third quarter or 3Q 2011 GDP) while exports will slow to about 2% due to Europe heading towards recession and sluggish rich “Organisation For Economic Coercion And Direction (OECD)” demand.

The middle-income nations are, I think, in a good position to weather the global slowdown, with significant space available for fiscal relaxation, adequate room for interest rate easing, ample high reserves and rather strong underpinning for domestic demand to rise.

I see the modest easing in China’s growth being counterbalanced by a pick-up in GDP gains in 2013 over the rest of the region. Outside China, growth has slackened sharply to 4.8% in 2011 (6.9% in 2010), but is expected to strengthen in 2012, reaching 5.8% in 2013.


GDP growth in China, which accounts for 80% of the region, had eased to about 9.1% in 2011 (10.4% in 2010) and is expected to slacken further to a still robust 8.2%-8.4% in 2012.

The World Bank projections point to growth moderating at 8.3% in 2013, in line with its longer-term potential GDP. Expansion is expected to emanate from domestic demand, with private spending and fixed capital outlays contributing most of the growth in 2012.

For China, the health of the global economy and high-income Europe in particular, represents the key risk at this time. Domestic risks include property overheating, local government indebtedness, and bloating bank balance sheets.

The 4Q 2011 growth of 8.9% annoy investors who are looking for indications either weak enough to justify further policy easing or strong enough to allay fears of a hard landing. Bear in mind the forecast growth for 2012 will be the weakest in a decade, and may cool further as exports slump.

The Chinese economy is buffeted by two very different forces: (i) slow global growth will hurt Chinese exports (especially to its largest trading partner, European Union) which rose by 7% in December, and exporters foresee more trouble ahead; however, (ii) analysts point to strong retail sales (up 18% in December) reflecting rising wages and domestic spending which represented about 52% of GDP in the first quarter, higher than in 2009-11.

China is counting on its massive effort to build low-income “social housing” to provide enough demand to keep the real-estate market from collapsing.

It is unclear whether China can accelerate this program to build 36 million subsidised housing by 2015enough to house all of Germany’s households. But financial markets are anticipating worse news ahead. After all, the Shanghai Composite Index fell 21% in 2011. As the adage goes, stock analysts did forecast 10 of the past 3 recessions!

The yuan

Appreciation of the yuan (renmimbiRMB) against the US dollar in 2012 is expected to slow to about 3%, from +4.7% in 2011. The yuan closed at 6.3190 at end 2011, up about 8% compared with June 10 (when China effectively ended its 2-year long peg to the US dollar and has gained 30% since mid-2005 when it was last revalued.

The slowdown reflects growing demand for the US dollar amid uncertainty, lower growth, diminishing trade surplus, and growing US military presence in Asia, according to China’s Centre for Forecasting Science (of the Chinese Academy of Sciences) which reports directly to the State Council, China’s Cabinet.

Much of it will be in the latter year as China is likely to keep the yuan relatively stable in the first half to allow time to assess the impact of goings-on in the euro-zone. Dollars are pumped in via state banks, providing markets with a clear signal it will not allow the yuan to depreciate, while not in a hurry to let it appreciate either. The yuan has since moved sideways.

Off-shore yuan

To make the yuan a true reserve currency, China begun to liberalise currency controls and encourage an offshore yuan market in Hong Kong, creating an outlet for moving the currency across borders. However, foreign investors in China have been slow in using the yuan.

In practice, it is still difficult to buy & sell yuan because of paperwork & bureaucracy. It is still easier to settle in US dollar as it is the universal practice. Its convenience outweighs the potential costs of any unfavourable move in the US dollar-yuan rate. Nonetheless, China is encouraging more businesses to use the yuan and more US banks to step-up their yuan-settlement business.

This market will grow as China diligently moves to internationalise its currency. Encouraged by the authorities, a vibrant offshore yuan market has blossomed in Hong Kong. Beijing still controls the currency and how the yuan bought in Hong Kong can be brought back to China.

Yuan deposits in Hong Kong rose more than 4 times to 622.2b yuan (nearly US$100bil) at end September 2011 from a year earlier according to the Hong Kong Monetary Authority, and now account for 10.4% of bank deposits.

Growth in offshore yuan stalled in late 2011 as China slowed its currency appreciation against the dollar. Given Beijing’s gradualist approach to reform, the market will soon revive.

An audience poll at the recent 2012 Asian Financial Forum in London indicated 63% believes full yuan convertibility is more than 5-years away.

The very fact that London wants to be a yuan-trading centre now says a lot. Only 10% of China’s international trade is settled in yuan, rising to 15% in 2012. It’s still a small market in the global context.

The yuan is used for just 0.29% of all global payments in November 2011 according to financial messaging network Swift. By comparison, the euro’s share is about 40%.

Dim-sum bonds

A booming business in dim-sum bonds (offshore yuan denominated bonds) followed, with companies including Caterpillar and McDonalds issuing such bonds. In September 2011, a spurt of capital flight towards “safe haven” assets in the US tied to the worsening debt crisis in Europe caused currencies of emerging nations to depreciate against the US dollar.

In East Asia, modest declines were recorded compared with South Africa (the rand fell 22%) and Brazil (the real dropped 18%). Only the Indonesia rupiah (down 5.8%) and the Malaysia ringgit (fell 5.4%) come under some pressure.

This event slowed the appreciation of the yuan and with it, trading in dim-sum bonds eased as investors were no longer in a hurry to invest. Over the medium-term, most analysts expect this yuan market to grow in the face of its massive US$3.18 trillion in reserves, as China moves to build its international status.

When dim-sum bonds started to hit the market in 2010, investors were enthusiastic, bidding up prices and driving down yields. But in the second half of 2011, the average price of investment grade dim-sum bonds fell 3.3%, amid a broad flight towards quality spooked by euro-zone turmoil and Chinese accounting scandals.

Bankers hope new entrants (private banks, commercial banks, mutual funds & life insurers) will give the market more stability this year. They would add depth & breath to the market, which tripled to 185b yuan (US$30bil) in dim-sum bonds issued in 2011. Expectations are for such bond issuance to reach 240 billion yuan this year, as new issuers (including more foreign companies) join early adopters such as government entities & state run banks.

This offshore bond market has developed well over the past year. Investor diversification in both types & geographics is still evolving, which is key to the healthy growth of the market. Equally important, investors look to the continuing appreciation of the yuan.

In addition, its average yield has risen to 3.8% (from 2.35% since mid 2011) and most now trade at higher yields than comparable US dollar bonds.

This rise in yields reflects expectation for (i) slower yuan appreciation; (ii) increase in supply; and (iii) investors desire for a higher liquidity premium during market downturns. Overall, the dim-sum market is turning into a buyer’s market.

Bilateral arrangements

China is forging ahead in laying the groundwork to internationalise the yuan via bilateral arrangements with foreign companies, nations & financial centers, particularly Hong Kong (mainly because it can fully control the terms of the market). More mainland-based financial institutions will be able to issue yuan denominated bonds in Hong Kong.

This is part of a broader effort, first started in July 2009 when it encouraged enterprises in Shanghai & Guangzhou province to use the yuan when settling trade with Hong Kong, Macau and some foreign companies (see my column “China: RMB Flexibility Not Enough” of July 3, 2010).

The post-X’mas direct yuan-yen trade deal forms part of a wide-ranging currency arrangement between China & Japan to give the use of the yuan a big boost. After all, China is Japan’s largest trading partner with 26.5 trillion yen in 2-way transactions last year. Encouraging direct settlement in bypassing the US dollar would reduce currency risks and trading costs. Also, Japan will buy up to US$10bil in yuan bonds for its reserves even though it represents no more than 1% of Japan’s US$1.3 trillion reserves. And, it is now easier for companies to convert Chinese and Japanese funds directly into each other without an intermediate conversion to US dollar. About 60% of China-Japan trade is settled in US dollar, a well-established practice.

The package allows Japan backed institutions to sell yuan bonds in the mainland (instead of Hong Kong) helping to open China’s capital market.

In recent weeks, China has taken new steps to promote the use of yuan overseas, including allowing foreign firms to invest yuan accumulated overseas in mainland China; widening the People’s Bank of China (its central bank) network of currency swaps with other central banks to enable their banks to supply yuan to their customers, including with Thailand, South Korea and New Zealand totalling 1.2 trillion yuan.

It already has completed arrangements with the big Asean counterparts. Berry Eichengreen (University of California at Berkeley) observed: “Japan appears to be acknowledging implicitly that there will be a single dominant Asian currency in the future and it won’t be the yen.”

But Harvard’s Jeffrey Frankel is more down to earth: “This hastens a multicurrency world, but this is just one of 100 steps along the way.”

China still has a way to go in: (i) getting the yuan fully convertible (ii) reducing exchange rate interventions (iii) liberalising interest rates, and (iv) reforming the banking system. In all, so the yuan can really trade freely.

What to do?

The China-Japan deal points the way, nudging the yuan towards the inevitable becoming a reserve currency alongside now discredited US dollar and the euro. This is to be welcomed by all.

China must realise a fully internationalised yuan should be free to float (and to appreciate) part of its overall reform. Over the longer term, though, avoiding huge imbalances is good for everyone, not least China. While it is understandable for its Prime Minister to label China today as “unstable, unbalanced, uncoordinated and ultimately unsustainable,” opportunities to take advantage of new openings don’t come often.

Alexander Gerschenkron, my professor at Harvard (in my view, the best economic historian of his time) points to economies like China as having “advantages in backwardness,” including China’s ability to weather shocks: high reserves, robust fiscal situation and comfortable external position.

Shakespeare’s Hamlet sums it up best: “If it be not now, yet it will come – the readiness is all.” A grown-up yuan is good for China’s welfare.

It also means a more stable world economy which benefits the United States. For China, there will never be enough cushion. Politicians need to seize the moment and act boldly.

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email:

To Yuan or not to Yuan, that is the question  

The government of Zimbabwe is considering using China’s Yuan as their national currency.
China has reportedly been offered mining rights by Mugabe, despite protests [EPA]

Bulawayo, Zimbabwe – From downtown shops that stock cheap clothing and shoes that fall apart after one wear, to mining concessions in platinum, gold and diamonds – the Chinese finger is now in virtually every Zimbabwean pie.

From city sidewalks to low-income suburbs, the Chinese have become part of the local population, and if some senior government bureaucrats have their way, the country could soon find itself adopting the Chinese Yuan as its official currency.

For some influential monetary policy czars, the massive assailing of the Zimbabwean economy by the Chinese now only requires the Yuan to strengthen these economic reconstruction efforts.

Invited by President Robert Mugabe as part of his infamous 2004 “Look East” policy to help drive the economy and employment creation, after relations with former traditional investment partners the European Union and United States soured, China has been able to create its own little sphere of influence and establish an ubiquitous presence in Zimbabwe.

Zimbabwe looks to China for economic revival

This is despite being unpopular with Zimbabwe’s industrial and commercial players – and general members of the public who accuse the Chinese of poor labour practices and shoddy goods and services.

Late in 2011, Reserve Bank governor Gideon Gono, seen by many as a close ally of Mugabe, announced he was in favour of having the Chinese Yuan as the country’s official currency. After the Zimbabwean dollar was suspended in 2008, the country has been using a multi-currency regime, which includes the use of the US dollar, the South African rand and the Botswana pula.

According to Gono, the Chinese Yuan would be introduced alongside the Zimbabwean dollar. Mugabe’s political supporters have been calling for currency reforms to bring back the Zimbabwean dollar.

“With the continuous firming of the Chinese Yuan, the US dollar is fast ceasing to be the world’s reserve currency and the eurozone debt crisis has made things even worse,” Gono told state media in November.

“As a country, we still have the opportunity to avoid being caught napping, by adopting the Chinese Yuan as part of consolidating the country’s ‘Look East’ policy.

“It’s only recently when we had the startling revelations, with Angola offering to bail out her former colonial master Portugal from her debt crisis. This can also happen with Zimbabwe if we choose the right path,” Gono added.

He continued: “If we continue with our ‘Look East’ policy, it will not be long [until] we will also be volunteering to bail out Britain from her debt crisis, and I will not wait for my creator’s day before this happens. There is no doubt that the Yuan, with its ascendancy, will be the 21st century’s world reserve currency.”

‘Handing over’ the country?

Officials from Mugabe’s Zimbabwe African National Union – Patriotic Front see huge potential in using the Yuan, citing the growth of the Chinese economy under BRICS, which brings together emerging global economic powerhouses Brazil, India, China and South Africa.

But not everyone is as upbeat about such prospects.

There are concerns that this could mean “handing over” the country to the Chinese, who already have been offered huge mining rights by Mugabe – despite protests from his coalition government partners. The country’s finance minister, Tendai Biti, has said that Mugabe was forfeiting state resources to China, whom critics are calling “Africa’s new coloniser”.

Economist Eric Bloch said “it is not practical” for Zimbabwe to adopt the Chinese Yuan.

“Zimbabwe won’t have any interaction with international markets, as the US dollar remains the standard currency in international trade,” Bloch explained.

With China increasingly being touted to overtake the US as the world’s largest economy, the temptation to embrace all things Chinese has proven too much to resist for poor economies across the globe, contends Tafara Zivanayi, an economics lecturer at the University of Zimbabwe.

“There has been false hope given to Chinese economic growth, with many African countries imagining they can transfer this growth to their own economies,” Zivanayi said.

“Such decisions (to adopt a foreign currency) as usually based on international trade indices and monetary policies of the country where the currency is domiciled. Even if there have been projections that the Chinese economy will surpass the US economy, this won’t happen overnight,” Zivanayi said.

“There are still concerns about Chinese penetration of international, especially low income, markets and creating wealth for itself and not host countries,” Zivanayi said.

Even traders who have long ridiculed cheap Chinese products and have no grasp of international trade intricacies find themselves offering opinions about the prospects of adopting the Chinese Yuan.

“As long as things have worked fine for us using the American dollar, why change that formula?” asked Thabani Moyo, a commuter omnibus driver. His colleagues, who are struggling to handle giving change in the basket of currencies they receive, nodded in agreement.

Gono and other opponents of US currency cited this lack of change in coins as a reason why Zimbabwe needed to adopt a single currency or revert to its own, previously useless, dollar.

However, during the presentation of the national budget for the 2012 fiscal year, Biti told parliament that Zimbabwe would continue using US currency until the economy stabilised.

Not everyone supports the introduction of the Chinese Yuan. “We want real money, not zhing-zhong,” taxi driver Jourbet Buthelezi said, referring to the pejorative term Zimbabweans use for sub-standard Chinese goods.

A version of this article was first published on Inter Press Service.
Source: IPS

The Exchange Rate Delusion of US Trade Deficit !

Michael Spence: The Exchange-Rate Delusion

A 100 yuan banknote (R) is placed next to a US$100 banknote. — PHOTO : REUTERS >>

If one looks at the trade patterns of the global economy’s two biggest players, two facts leap out.

One is that, while the United States runs a trade deficit with almost everyone, including Canada, Mexico, China, Germany, France, Japan, South Korea, and Taiwan, not to mention the oil-exporting countries, the largest deficit is with China.

If trade data were re-calculated to reflect the country of origin of various components of value-added, the general picture would not change, but the relative magnitudes would: higher US deficits with Germany, South Korea, Taiwan, and Japan, and a dramatically lower deficit with China.

The second fact is that Japan, South Korea, and Taiwan – all relatively high-income economies – have a large trade surplus with China. Germany has relatively balanced trade with China, even recording a modest bilateral surplus in the post-crisis period.

The US has a persistent overall trade deficit that fluctuates in the range of 3-6 per cent of GDP. But, while the total reflects bilateral deficits with just about everyone, the US Congress is obsessed with China, and appears convinced that the primary cause of the problem lies in Chinese manipulation of the renminbi’s exchange rate.

One problem with this view is that it cannot account for the stark differences between the US and Japan, Germany, and South Korea. Moreover, the real (inflation-adjusted) value of the renminbi is now rising quickly, owing to inflation differentials and Chinese wage growth, particularly in the country’s export sectors. That will shift the Chinese economy’s structure and trade patterns quite dramatically over time.

The final-assembly links of global-value added chains will leave China for countries at earlier stages of economic development, such as Bangladesh, where incomes are lower (though without producing much change in the balance with the US).

A somewhat more sensible concern might be that the dollar’s reserve-currency status causes it to be ‘over-valued’ with respect to every currency, not just the renminbi. That could create additional pressure on the tradable part of the US economy, and thus might help to explain why the US tradable sector has not generated net employment for two decades.

But, in order to explain performance relative to Japan and Germany, one would have to argue that the euro and the yen have been undervalued, which makes no sense.

In fact, the employment generated by the tradable sector has been in services at the upper end of the distributions of value-added per person, education, and income. As a result, growth and employment in the tradable sector have gone separate ways, with healthy growth and stagnant employment. In Germany, by contrast, the tradable sector is an employment engine. The same is true of Japan.

The US economy’s distinctive features for at least a decade prior to the crisis that began in 2008 were an unsustainably high level of consumption, owing to an illusory wealth effect, under-investment (including in the public sector), and savings that fell short of the investment deficiency. That excess household and government consumption fueled the domestic economy – and much of the global economy as well.

In several European countries that now confront fiscal and growth challenges, the pattern was somewhat different: most of the excess consumption and employment was on the government side. But the effect was similar: an unsustainable pattern of income and employment generation, and lower productivity and competitiveness in these economies’ tradable sectors, leading to trade deficits, stunted GDP, and weak job creation.

One could argue that the euro has been and still is overvalued, and that this has hindered many eurozone economies’ productivity relative to non-eurozone countries. But the relative productivity deficiencies within the eurozone are more important for growth, and have nothing to do with the exchange rate.

Excessive Focus on currencies

The focus on currencies as a cause of the West’s economic woes, while not entirely misplaced, has been excessive. Developing countries have learned over time that real income growth and employment expansion are driven by productivity gains, not exchange-rate movements. This, in turn, requires public and private investment in tangible assets, physical and telecommunications infrastructure, human capital and skills, and the knowledge and technology base of the economy.

Of course, it is possible for a country’s terms of trade to get out of line with income and productivity levels, requiring a rebalancing. But resetting the terms of trade is no substitute for tackling the structural underpinnings of productivity.

None of this is peculiar to developing countries. Underinvestment has long-term costs and consequences everywhere. Excess consumption merely hides these costs temporarily.

In the US, productivity deficiencies have led to a pattern of disconnection from global supply chains. So the challenge for America is not only to restore productivity, but also to restore its links to the main currents of world trade.

China’s growth – and, more generally, that of the major emerging economies – provides a substantial potential tailwind. That is certainly true nowadays for Germany, Japan, and South Korea. The US and others can take advantage of it as well, but only if productivity relative to income levels in specific areas of potential competitiveness begin to rise.

As long as America economic policy remains focused primarily on deficits, domestic demand, exchange rates, and backsliding on trade openness, its investment deficiencies will remain unaddressed. That means that its employment and income-distribution problems will remain unaddressed as well.

The good news is that, at a deep level, incentives across advanced and developing countries are aligned. The emerging economies would like nothing more than the restoration of sustainable patterns of growth in the advanced economies, and are prepared to be cooperative players in that process. But focusing on these countries’ exchange rates is not the right way to go about it.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, and Senior Fellow at the Hoover Institution, Stanford University. His latest book is The Next Convergence – The Future of Economic Growth in a Multispeed World (

China bashing not the solution !

World Trade Organization accession and membershipImage via Wikipedia


The US Senate is scheduled to vote this week on a “currency Bill” to allow actions against China’s imports. But blaming China may unleash a trade war without solving America’s problems.

IS China’s currency and trade performance a threat to the United States? Or are American politicians using China as a scapegoat for the country’s economic problems?

“China bashing” has been on the rise in the United States. It is widely thought that politicians of both parties are doing it to gain popularity in view of the coming elections.

For some years, Congress members have threatened to take action against Chinese imports to retaliate against what they see as China’s manipulation of its currency level.

The politicians say that the Chinese yuan is lower than what it should be if there were no government intervention.

They charge that the undervalued currency enables China to have a large trade surplus vis-a-vis the United States, and that this has caused the loss of American jobs.

These charges are refuted by the Chinese government, which argues that the US trade deficit is due to domestic factors and not Chinese policy. It also points to the 7% appreciation of the yuan versus the dollar in recent months.

This issue has been a central economic policy issue between the two major countries. It could escalate into a major battle on the ground.

The US Senate is scheduled to vote tomorrow on a Bill aimed at enabling import tariffs to be placed on Chinese imports as a retaliation against the alleged currency manipulation.

In a first step, the Senate on Oct 3 voted 79-19 to allow a week-long debate on the Currency Exchange Rate Oversight Reform Act of 2011. The Bill mandates a process for imposing tariffs on imports of a country with allegedly “misaligned currencies”.

Though China is not named, it is obviously the target. The Bill would in effect require the US Treasury Department to determine if China was manipulating the yuan. If it finds this to be the case, extra tariffs can be placed on some imported Chinese goods.

The Bill is expected to pass in the Senate. But a similar Bill has to also go through the House of Representatives, and be approved by US President Barack Obama, before trade measures can be taken.

These two steps are far from assured. Although it seems the majority of the House are in favour, Speaker John Boehner said last week it was dangerous to be moving legislation through Congress to force “someone to deal with the value of their currency … while I’ve got concerns about how the Chinese have dealt with their currency, I’m not sure this is the way to fix it”.

Obama last Thursday accused China of “gaming” the trade system to the disadvantage of other countries, especially the United States. But he also expressed concern that the Senate Bill “may not actually work … as it may be only ‘symbolic’, and would probably not be upheld by the World Trade Organisation (WTO)”.

Nevertheless, the probability of the passage of the Senate Bill has heightened US-China tensions and raised the potential of a serious trade war.

As could be expected, Chinese government agencies and think tanks are reacting strongly to what they perceive as a protectionist move.

The People’s Bank of China (its central bank) said the Senate Bill would not help resolve the United States’ domestic issues such as the trade deficit, low level of savings and high unemployment, but could potentially affect the economy and market confidence.

It added: “The passage of the Bill may seriously affect China’s currency reforms, potentially leading to a trade war between the two sides.”

Xu Mingqi, deputy director of the Institute of the World Economy at the Shanghai Academy of Social Sciences, had this to say: “It is easy for the US to make China a scapegoat of its domestic problems at a time when its economy remains weak with a high unemployment rate and the next general election only 13 months away.”

In the event the Senate Bill makes its way into actual law, a dispute case will most likely be taken against the United States at the WTO.

WTO rules do not allow countries to impose punitive duties on the basis that a certain country’s currency is undervalued. That this is so is appropriate. Valuing currencies to see if they are “manipulated” is very complex and difficult.

For example, the United States has also been accused of pushing its currency down through its controversial policy of “quantitative easing” (central bank pumping of funds into the banking system).

And is Switzerland “manipulating” its currency by announcing it will not tolerate further appreciation of the franc?

Allowing the currency issue to be a subject of possible unfair practice open to trade sanctions will open the road to many other issues being similarly recognised, such as a country’s tax rates, interest rates, and labour and environmental standards. There will be no end to having reasons for new trade protectionism.

A US law based on the Senate Bill will probably be found to be inconsistent with US obligations in the WTO. But by the time the WTO dispute system panel makes a final ruling (this may take years), some damage may already be done should the United States act against Chinese imports in the meantime.

China may not take the US actions lying down, and can come up with retaliatory action on US goods. Thus, a trade war may be unleashed.

Interestingly, although some well known American economists like Paul Krugman and Fred Bergsten advocate US action against Chinese imports, some business associations as well as important newspapers like the New York Times, Wall Street Journal and Financial Times have come out strongly against the Senate Bill for its protectionism and trade war potential.

The high-pitched attack on China because of its large trade surplus with the United States is misplaced. Little of the gross surplus actually accrues to China.

A 2010 paper by the South Centre shows that only a small part of China’s exports to the United States is actually retained as income in China.

For example, in 2005, China’s gross trade surplus with the United States was US$172bil (RM543bil), but in value-added terms (what is earned by the respective countries after deducting the import content of their exports), it was only US$40bil (RM126bil).

Further, a large part of the Chinese trade surplus in value-added terms was earned by foreign firms in China and thus, does not belong to China. As a result, income left in China was no more than 30% of the total value of exports to the United States.

Therefore, the criticism that China enjoys extraordinarily high trade surpluses with the United States is misplaced.

Also, even if US trade measures reduce Chinese imports into the United States, this does not mean that the US import bill will be reduced.

Goods from other developing countries such as Vietnam or Indonesia may just replace the Chinese goods.

Therefore, US actions based on the Senate Bill would hardly help the United States get rid of its trade deficit.

It is best that the United States take domestic actions to address its domestic economic problems, rather than make a scapegoat of other countries and potentially unleash new trade wars.

Currency War & Exchange RatesTension!

IMF Data Dissemination Systems participants: I...Image via Wikipedia

Tension over exchange rates


Amid heightened fears over eurozone sovereign debt risks and increasing concerns about the health of the United States and eurozone economies, worried investors have flocked to the safety of haven currencies, especially the Swiss franc, and gold.

While investors and speculators have since moved aggressively to buy gold, the switch from being large sellers to buying by a number of emerging nation’s central banks (Mexico, Russia, South Korea and Thailand) has helped propel the price of gold more than 25% higher this year, hitting a record US$1,920 a troy ounce earlier this month. At a time of high uncertainty in the face of the International Monetary Fund’s (IMF) latest gloomy forecast on global growth, few central banks relish the prospect of a flood of international cash pushing their currencies higher.

Massive over-valuation of their currencies poses an acute threat to their economic well-being, and carries the risk of deflation.

The Swiss franc

Switzerland’s national currency, the CHF, should be used to speculative attacks by now. So much so in the 1970s, the Swiss National Bank (SNB) was forced to impose negative interest rates on foreign investors (who have to pay banks to accept their CHF deposits).

And, it has been true in recent years, with the CHF rising by 43% against the euro since the start of 2010 until mid-August this year. There does not seem to be an alternative to the CHF as a safe haven at the moment.

With what’s going on in the United States, eurozone and Japan, investors have lost faith in the world’s two other haven currencies: US dollar (USD) and the yen.

This reflects the Federal Reserves’ ultra-loose policy stance and the political fiscal impasse in the United States which have scared away investments from the dollar. The prospect that Tokyo might once again intervene to limit the yen’s strength has deterred speculators from betting on further gains from it. To be fair, the CHF has also benefitted from recent signs that the Swiss economy, thanks in large part to its close ties to a resurgent Germany, is thriving.

But enough is enough. SNB made a surprising announcement on Sept 6 that it would buy foreign currencies in “unlimited quantities” to combat a huge over-valuation of the CHF, and keep the franc-euro exchange rate above 1.20 with the “utmost determination.”

On Aug 9, the CHF reached a new record, touching near parity against the euro from 1.25 at the start of the year, while the USD sank to almost CHF 0.70 (from 0.93). The impact so far has been positive: the euro rose 8% on that day and the 1.20 franc level had since stabilised. It was a gamble.

Of course, SNB had intervened before in 2009 and 2010, but in a limited way at a time when the euro was far stronger. But this time, with the nation’s economy buckling under the currency’s massive over-valuation, the risks of doing nothing were far greater. In July last year, following a chequered history of frustrated attempts, SNB vowed it would not intervene again. By then, the central bank was already awash with foreign currency reserves. Worse, the CHF value of these reserves plunged as the currency strengthened. In 2010, SNB recorded a loss of CHF20 billion, and a further CHF10 billion in 1H’11. As a result, SNB came under severe political pressure for not paying the expected dividend. But exporters also demanded further intervention to stop the continuing appreciation.

This time, SNB is up against a stubborn euro-debt crisis which just won’t go away. True, recent efforts have been credible. Indeed, the 1.20 francs looks defensible, even though the CHF remains over-valued. Fair value appears to be closer to 1.30-1.40. But inflation is low; still, the risk of asset-price bubbles remains. What’s worrisome is SNB acted alone. For the European Central Bank (ECB), the danger lies in SNB’s eventual purchases of higher quality German and French eurozone government bonds with the intervention receipts, countering the ECB’s own intervention in the bond market to help weaker members of Europe’s monetary union, including Italy and Spain.

This causes the spread between the yields of these bonds to widen, and pile on further pressure on peripheral economies. Furthermore, unlimited Swiss buying of euro would push up its value, adding to deflationary pressures in the region.

The devil’s trade-off

As I see it, the Swiss really has no other options. SNB has been attempting to drive down the CHF by intervening in the money markets but with little lasting effect. “The current massive over-valuation of the CHF poses an acute threat to the Swiss economy,” where exports accounted for 35% of its gross domestic product. The new policy would help exports and help job security. As of now, there is no support from Europe to drive the euro higher.

SNB is caught in the “devil’s trade-off,” having to choose risking its balance sheet rather than risk “mounting unemployment, deflation and economic damage.” The move is bound to cause distortions and tension over exchange rates globally.

New haven: the Nokkie’

SNB’s new policy stance has sent ripples through currency markets. In Europe, it drove the Norwegian krone (Nokkie) to an eight-year high against the euro as investors sought out alternative safe havens. Since money funds must have a minimum exposure in Europe and, with most European currencies discredited and quality bonds yielding next to nothing, the Nokkie became a principal beneficiary. It offers 3% return for three-month money-market holdings.

Elsewhere, the Swedish krona also gained ground, rising to its strongest level against the euro since June after its central bank left its key interest rates unchanged, while signalling that the rate will only creep up. What’s worrisome is that if there is continuing upward pressure on the Nokkie or the krona, their central banks would act, if needed with taxes and exchange controls. With interest rates at or near zero and fiscal policy exhausted or ruled out politically in the most advanced nations, currencies remain one of the only policy tools left.

At a time of high uncertainty, investors are looking for havens. Apart from gold and some real assets, few countries would welcome fresh inflows which can stir to over-value currencies. Like it or not, speculative capital will still find China and Indonesia particularly attractive.

Yen resists the pressure

SNB’s placement of a “cap” to weaken the CHF has encouraged risk-adverse investors who sought comfort in the franc to turn to the yen instead. So far, the yen has stayed below its record high reached in mid-August. But it remains well above the exporters’ comfort level.

Indeed, the Bank of Japan (BoJ) has signalled its readiness to ease policy to help as global growth falters. But so far, the authorities are happy just monitoring and indications are they will resist pressure to be as bold as the Swiss, for three main reasons: (i) unlike to CHF, the yen is not deemed to be particularly strong at this time it’s roughly in line with its 30-year average; (ii) unlike SNB, Japan is expected to respect the G-7’s commitment to market determined exchange rates; and (iii) Japan’s economy is five times the size of Switzerland and the yen trading volume makes defending a pre-set rate in the global markets well-nigh impractical.

Still, they have done so on three occasions over the past 12 months: a record 4.51 trillion yen sell-off on Aug 9 (surpassing the previous daily record of 2.13 trillion yen from Sept 2010).

The operation briefly pushed the USD to 80.25 yen (from 77.1 yen) but the effects quickly waned and the dollar fell back to a record low of 75.9 yen on Aug 19. But, I gather the Finance Ministry needs to meet three conditions for intervention: (a) the yen/USD rate has to be volatile; (b) a simultaneous easing by BoJ; and (c) intervention restricted to one day only.

Given these constraints, it is no wonder MOF has failed to arrest the yen’s underlying trend. In the end, I think the Japanese has learnt to live with it unlike the Swiss who has the motivation and means to resist a strong currency.

Reprieve for the yuan

I sense one of the first casualties of the failing global economic expansion is renewed pressure to further appreciate the yuan. For China, August was a good month to adjust strong exports, high inflation and intense international pressure. As a result, the yuan appreciated against the USD by more than 11%, up from an average of about 5% in the first seven months of the year. However, the surge had begun to fade in the first half of September.

But with the United States and eurozone economic outlook teetering in gloom, China’s latest manufacturing performance had also weakened, reflecting falling overseas demand.

This makes imposing additional currency pressure on exporters a no-go. Meanwhile, inflation has stabilised. Crude oil and imported food prices have declined, reducing inflationary pressure and the incentive to further appreciate the yuan. Looks like September provided a period of some relief. But, make no mistake, the pressure is still there. The fading global recovery may have papered over the cracks. Pressure won’t grind to a halt.

Central banks instinctively try to ward-off massive capital flows appreciating their currencies. There are similarities between what’s happening today, highlighted by the recent defensive move by SNB, and the tension over exchange rates at last year-end. It’s an exercise in pushing the problem next door.

This can be viewed as a consequence of recent Japanese action (Tokyo’s repeated intervention to sell yen). It threatens to start a chain of responses where every central bank tries to weaken its currency in the face of poor global economic prospects and growing uncertainty. So far, the tension has not risen to anything like last year’s level. But with rising political pressure provoking resistance to currency appreciation, the potential for a fresh outbreak remains real. The Brazilian Finance Minister just repeated his warning last year that continuing loose US monetary policies could stoke a currency war.

Growing stress

With the euro under growing stress from sovereign debt problems, the market’s focus is turning back to Japan (prompting a new plan to deal with a strong yen), to non-eurozone nations (Norway, Denmark, Sweden and possibly the United Kingdom) and on to Asia (already the ringgit, rupiah, baht and won are coming under pressure on concerns over uncertainty and capital flight). Similarly, Brazil’s recent actions to limit currency appreciation highlights the dilemma faced by fast growing economies (Turkey, Chile and Russia) since allowing currency appreciation limits domestic overheating but also undermines competitiveness.

This low level currency war between emerging and advanced economies had further unsettled financial markets.

Given the weak economic outlook, most governments would prefer to see their currencies weaken to help exports. The risk, as in the 1930s, is not just “beggar-thy-neighbour” devaluations but resort to a wide range of trade barriers as well. Globally co-ordinated policies under G-20 are preferred. But that’s easier said than done.

So, it is timely for the IMF’s September “World Economic Outlook” to warn of “severe repercussions” to the global economy as the United States and eurozone could face recession and a “lost decade” of growth (a replay of Japan in the 90s) unless nations revamped economic policies. For the United States, this means less reliance on debt and putting its fiscal house in order.

For the eurozone, firm resolution of the debt crisis, including strengthening its banking system. For China, increased reliance on domestic demand. And, for Brazil, cooling an over-heating economy. This weekend, the G-20 is expected to take-up global efforts to rebalance the world overwhelmed by heightened risks to growth and the deepening debt crisis. Focus is expected on the role of exchange rates in rebalancing growth, piling more pressure on China’s yuan.

Frankly, IMF meetings and G-20 gatherings don’t have a track record of getting things done. I don’t expect anything different this time. The outlook just doesn’t look good.

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting public interest. Feedback is most welcome; email:

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